Two major rating agencies have lowered their credit ratings on and provided stable outlooks for Connecticut’s general obligation bonds, raising concerns about the state’s budget flexibility amid continuing deficits.
Standard & Poor’s and Fitch Ratings announced changes to their ratings of the state’s general obligation (GO) bonds from “AA” to “AA-”, both with stable outlooks. Moody’s Investors Service affirmed its “Aa3” rating and Kroll Bond Ratings affirmed its “AA” rating, both with continued negative outlooks.
State Treasurer Denise Nappier said the message from the credit rating agencies points to the need for the state to make a sustained commitment to fortify its financial footing amidst persistent economic uncertainty.
S&P Global Ratings has lowered its ratings on the state’s: general obligation (GO) debt outstanding to “AA-” from “AA”; appropriation-secured debt to “A+” from “AA-”; and moral obligation debt to “A-” from “A”.
The downgrade reflects S&P Global Ratings’ view of state’s reduced budgetary flexibility, according to credit analyst David Hitchcock. He said substantial revenue shortfalls over the past year have left Connecticut with what the ratings firm believes are low reserves and an increasing share of the budget devoted to fixed costs.
Fitch has downgraded the state’s Issuer Default Rating (IDR) and the rating on the state’s GO bonds to “AA-” from “’AA”. The ratings on debt linked to the state’s IDR also have been downgraded.
“In our opinion, Connecticut has less flexibility to meet unanticipated revenue shortfalls, such as those that occurred in fiscal 2016, and may be poorly positioned should there be a national economic downturn in the next several years,” S&P’s Hitchcock added.
S&P observed the state is not budgeting to restore reserves in fiscal 2017, and projected out-year budget gaps in 2018 and beyond could prove troublesome in view of Connecticut’s historically cyclical finances. In the announcement, S&P said its stable outlook reflects that recent budget adjustments have been largely of an ongoing structural nature.
It cautioned, however, rising debt service, pension, and other post-employment benefit costs have pushed fixed costs to what it sees as a significant portion of the overall budget and could potentially hamper the state’s ability to make further budget cuts should new revenue shortfalls develop.
At the same time, it said, tax increases enacted in the last two bienniums have constrained revenue-raising ability.
Fitch said its stable outlook reflects its view that, despite the state’s high fixed cost burden and ongoing economic uncertainty, recent corrective actions have primarily been structural in nature, and managers continue to pursue fiscal management changes to improve the state’s longer-term prospects.
